Friday, September 28, 2012

One of the hot topics today is the polls. Most have Obama pulling away in the toss up states and ahead nationally. The conservative talking heads are expressing disbelief claiming that the polls are run by democrats and are trying to determine the outcome of the election. However, I find it hard to believe that the Wall Street Journal pollsters are a bunch of libs. Nevertheless, from a purely scientific viewpoint, one can call the polls into question. For whatever reason, most of the polls oversample democrats. The polls that don't actually have Romney ahead. Nonetheless, for the polls to be accurate, those who actually vote must reflect the composition of the polls. Thus, if the polls oversample democrats say 40 percent democrat, 30 percent republican and 30 percent independent, then the poll is only accurate if the actual voters keep the same percentages. While this may be likely, the likelihood that oversampling democrats is accurate is dubious at best. Consider the following: since the election in 2008, democrat registration has fallen dramatically. In the swing states consider the following: democrats are down over 400,000 in Ohio, 5 percent in Florida, 9.5 percent in Iowa and 19.7 percent in New Hampshire ( http://www.foxnews.com/politics/2012/09/27/drop-in-ohio-voter-registration-especially-in-dem-strongholds-mirrors/#ixzz27mDHMdtX). The pollsters admit that their models are largely unchanged from 2008 and reflect voting patterns from that election. Consider this, first the fall in democrat registrations should call for a revision of the samples. Second, common sense tells you that Obama will not do as well among any voting bloc save the progressive wing of the democrat party. He has to do worse among Catholics for the administration's stand regarding mandated birth control for employers. He has to do worse among Jews for his anti-Isreal stance and the anti-semitism in the Occupy Wall Street crowd - a democratic favorite. He may still get 95 percent of the black vote but the number of black voters will be significantly less. All this is common sense. For the polls to ignore all of this lessens their value and leads me to conclude that this election won't even be close. Romney in a landslide.

One thing has puzzled me about current Fed monetary policy so perhaps you, kind reader, might have the answer. Fed policy has been expansionary. Ben Bernanke has solid support on his Open Market Committee for loose monetary policy. Just read the speeches of the Fed governors. Atlanta Fed president Dennis Lockhart has said "For me," Lockhart told the Atlanta Institute of Internal Auditors, "the policy question was what tools in combination have the greatest chance of producing real results in terms of faster growth and employment gains while preserving price stability." (http://www.frbatlanta.org/pubs/financialupdate/12q3_lockhart_monetary_policy.cfm?d=1&s=email). Well Lockhart and his Fed buddies have me confused because the one obvious change that they could have made but haven't is the rate the Fed pays on bank reserves. For years, the Fed paid zero interest on bank excess reserves - the amount that banks hold over the amount that they are required to hold on transactions deposits (10%). Currently, the Fed is paying 0.25 percent on excess reserve holdings. To put that in perspective, the 3-month, 6-month, one year and two year Treasury all yield less than 0.25 percent. That means that banks could simply hold excess reserves than buy Treasurys and earn higher rates! No wonder the Fed instituted QE1 and QE2 which purchased Treasurys. Wouldn't it have been simpler just to lower the rate paid on excess reserves? That way the banks would be induced to purchase the Treasurys and the Fed would not have bloated its balance sheet. Now that the Fed (re: Lockhart) states that its objective is to promoted faster economic growth, then wouldn't eliminating the rate on reserves push banks into lending more? Sure this is a tough environment but the world on the street is that the banks' lending standards have become unreasonable even in these difficult times. Perhaps the reason is that they do not have to make as many loans due to the Fed paying them interest on reserves.

Finance professors teach that markets are rational. That thinking is probably dated because in large part market movements may not be rational. First, there is a herd mentality in markets that lead to irrational movements. Second, markets are affected by actions initiated by computer driven models which may be contrary to what an individual investor might do. Rationality is an interesting topic in today's markets. Now the nominal yield on Treasurys is close to zero which means that for long term bonds, the yields are likely to be negative when adjusted for inflation. Meanwhile, in Europe, many core bond markets are already have negative short-term yields and with the turmoil in the eurozone, inflows from Europe to Treasurys could push US rates negative. Why would a rational investor buy an instrument whose return is practically guaranteed to be zero? The textbook answer is "safety". The Treasury is a safe haven in a turbulent market fraught with uncertainty. Well that makes sense but who says the Treasury is safe? Sure it may be safe against default but it certainly is not safe from loss. Another strike against the rational market argument is that junk bonds are currently trading at record low rates. Of course this is because those rates of around 6 percent seem lofty compared to Treasurys. However, remember these are junk bonds we are talking about. Even in the best of times, junk bonds pose a risky bet for investors. Now in this economic climate we would expect the yields on these bonds to go up not down. But going down they are because of the miniscule return from Treasurys yet the risk has gone up not down. Who says markets are rational?

Saturday, September 15, 2012

The Fed just announced QE3. However unlike the first two iterations, this one has no expiration date or amount. Call it QE infinity. The action was taken at the last Open Market Committee - although Bernanke had hinted at it in his Jackson Hole speech earlier. The vote for the FOMC was 11-1. On the committee sit all 7 governors of the Fed, the president of the New York Fed and four of the other reserve bank presidents. I presume the one "no" vote was from the president of the Richmond Fed who has consistently opposed quantitative easing. On the other side of the spectrum is the president of the Chicago fed who wants even more easing than was agreed upon. The amount the fed will buy is $40 billion per month in mortgage-backed securities. This is an important departure from the other QEs in that the Fed is not buying Treasurys. Thank goodness for small favors. The purchasing of Treasurys is called monetizing the national debt and essentially has the Fed supporting increased government spending by purchasing Treasurys directly from the US Treasury. I have long advocated that this be made illegal except in a declared national emergency. When the Fed buys mortgage-backs it is purchasing bonds that are collateralized by mortgages. It is not clear if it is only buying the bonds from Fannie Mae and Freddie Mac or from the private sector or both. The issuer of the bonds buys the mortgages from originators, pools the mortgages and issues bonds against the pools. The purchaser of the bond (now the Fed) does not own the mortgages - they remain on the balance sheet of the issuer of the bond (say Fannie Mae). The issuer typically guarantees the timely payment of the principal and interest of the mortgages to the bond holder. In the case of default of a mortgage, the holder of the mortgage - not the bond - bears the risk. Generally, the mortgage pools are diversified so that unless there is a general mortgage meltdown, the risk that the bond will default are minimal. Historically, the purchaser of the mortgages has policed risk by evaluating defaults among the originators. Thus, if an originator is making too many "bad" mortgages, the purchaser will either buy subsequent mortgages at a haircut or not at all. As a consequence, the risk to the bond holder should also be minimal. Of course, when times are not usual, like in the mortgage market meltdown, then the bonds themselves default because the bond issuer defaults by not being able to cover the defaults of the homeowners. By announcing that it is only purchasing mortgage-backs, the Fed has announced that it is no longer supported the deficit spending of the congress and the White House. Rather, it has announced that it is supporting the mortgage market instead. This is because when the bond issuer sells the bonds, it then uses the funds to purchase more mortgages. So if I had my druthers, I prefer this QE to the others.

Wednesday, September 12, 2012

I am outraged over the murder of four Americans including the ambassador to Libya yesterday on 9/11. I was earlier outraged over Egyptians going inside the embassy compound and trashing the American flag and flying a black al-qaeda flag in its stead. The question that needs answering is where were the marines? I had thought that each embassy had a detachment of marines to provide security. If that is so, then how did the protestors get insider the embassy compounds? Why aren't there dozens of dead radical muslims in Egypt and Beghanzi? Where were the marines? This shocking lack of security to me is an impeachable offense. No not of the president but of the secretary of state who continues to exhibit incompetency. These episodes mean that Hillary Clinton must go. If she does not resign then the senate should immediately move to impeach her. Yes I know poor old pitiful Harry Reid won't do it but at least the republicans should have the testosterone to recommend it. Impeach Hillary!

Friday, September 7, 2012

• The democratic convention presented us with a continuing contradiction. Among their most reliable supporters are Jews, blacks and Mexican-Americans (most of the media would say “Hispanics” but Cuban-Americans are reliably republican). But what was on parade should have been offensive to these groups. It was in your face abortion, gay rights and the anti-God fiasco. Blacks and Hispanics are notably against abortion, against gay marriage and pro-God. If the republicans were smart (remember George Will calling them the Stupid Party) they would blanket black and Hispanic markets with snippets from the democratic convention. They should also hold meetings with ministers and priests who serve these communities as well. As to the Jews, Obama has poorly veiled enmity toward Israel and many of the democratic leadership are openly anti-Semitic. I encourage the republicans to go after black, Hispanic and Jewish democrats in congress to force them to explain their allegiance to the democratic party. The congressional black caucus – excepting Allen West and Tim Scott – and especially Debbie Wasserman Schultz look like useful idiots.
• My father was a proud alumnus of Savannah State University. I only knew him to be bitter about one thing. His diploma said “Georgia State College”. Back in the old days, some southern states attached “university of” to an all-white school and “college” to an all-black school. Thus Tennessee State University (black) and the University of Tennessee (white), Alabama State University (black) and University of Alabama (white) and of course there was Georgia State College (black) and the University of Georgia – ironically my alma mater. So when the state decided to put convert a two year college to a four year (white) university in Atlanta, they took away my Dad’s school’s name and gave it to the white school and renamed Dad’s as Savannah State.
• But speaking of Savannah State, Dad would not have been embarrassed by their losing to Oklahoma State 84-0 and then the next week to Florida State. As a matter of fact he would have been proud of his Tigers. He knew they moved from Division II to D-I mainly to play basketball with the big boys to get the revenue to support their athletic programs but he would have never dreamed that they would do the same in football. If he were still here, I would have taken him to Stillwater and to Tallahassee. He would have worn his Tiger gear with pride.
• By the way, this was a historic two weeks with Savannah State playing Oklahoma State and Florida State, Howard playing Rutgers, Florida A&M playing Oklahoma, Delaware State playing Delaware, Southern playing New Mexico, Grambling playing TCU, Jackson State versus Mississippi State, and Fort Valley State (my mother is an alumna) playing Valdosta State.
• Today I saw an old beat up wreak of a Chevrolet pickup with a bumper sticker that said “Made in America by Americans”. I was laughing so hard I almost had to pull over.

While at the family farm awaiting the beginning of bow season I head a public service announcement pertaining to renewing a Georgia’s driver license. In order to renew the applicant is required to have the following documents:
• You must be a Georgia citizen
• You must be a US citizen and you must prove it. How?
• You must have at least one (1) original or certified document to prove your Primary Identity; and
• At least one (1) document to prove your Social Security Number; and
• At least two (2) documents to prove your Residential Address; and
• Appropriate Name Change documents, if needed
Excuse me? The Georgia law is in accordance to the Real ID Act enacted by the congress in 2005. What does Eric Holder and the Obama Administration has to say about this. If they are suing states over voter ID why haven’t they sought repeal?. And by the way, didn’t you need a valid photo ID to be admitted to the democratic convention? Does this mean that the democrats are racists?

Monday, September 3, 2012

Back in the early 1970s I was faculty advisor to the University of Florida College Libertarians. The students were the answer to the leftist clubs on campus. I remember them as being a fun group but serious about free markets. We had bumper stickers that said “Taxation is Theft”. Mine got stolen off my Saab Sonnet. I tell people that I was young and naïve but now that I am matured I realize that taxation is expropriation. Today far from being happy warriors, libertarians have joined liberals as being never happy. Do you know a happy liberal? I don’t. They are usually bitter, cynical and intent on spreading their unhappiness upon the rest of us. Sadly, the same is now true of many of today's libertarians. They, too, are usually bitter and cynical. Their only saving grace is that they – true to their philosophy – aren’t in the least interested in spreading the misery but keep it to themselves. There are three propelling forces in modern libertarianism: free markets, railing against the Federal Reserve and non-intervention in foreign affairs. I am still strongly on board with the first. As I pointed out in my last posting (a Knoxville News- Sentinel article), today’s republicans and even Tea Party activists have not given serious consideration to privatizing federal spending. I believe that only the military would be exempt from privatization. I firmly believe that we could cut the federal budget in half and achieve more, rather than less, benefits from it. I have written before that I believe that the Federal Reserve has been brilliantly conceived although at times poorly executed and the changes recommended by its detractors would be suboptimal. As to foreign policy, although George Washington and Thomas Jefferson advocated no “entangling alliances” with foreign countries, I believe that it is not in the national interest to have a laissez faire stance with regard to foreign policy. Libertarians would argue that free trade would motivate nations due to increased economic well being. However, socialists have demonstrated that economic well being is not primary to them. More importantly, despots have demonstrated the same. A basic question is whether foreign alliances can minimize the potential harm done by those we consider as the bad guys. I think most of us looked askance at Ron Paul when he said that if we were libertarians, the victims of 9/11 would still be alive. Few of us would make this argument. One of the clearest examples of a bitter libertarian is found in Gary North’s Mises.org piece “If only D’Souza were right” http://mises.org/daily/6182/If-Only-DSouza-Were-Right. Here North virtually ignores D’Souza’s film and instead rails about what is not in the film – namely blaming Bush and the republican’s for the economic and deficit mess that we are in. North points out that congress could have stopped Bush and Obama but did not do it. He points out that D’Souza ignores the unfunded liabilities of the federal government and Bush’s prescription drug benefit. Of course North does chose to point out that politically Bush had little choice and his signing of the bill took the issue off the board. The democrats were pushing hard for the benefit in their upcoming campaign and Bush knew that in a close election, the vote of seniors was critical. Yes it was a budget buster, so it was enacted without funding leaving that responsibility to future generations. North then argues that Obama is doing nothing more than continuing Bush’s policies. Indeed, he calls Obama Bush in blackface and the “star of a 21-century minstrel show.” Pardon me if I join the crowd and say that such a characterization is unfortunate and frankly racist. So read North’s piece. Also go see the movie. What D’Souza wants the viewer to do is to get to know Barack Obama. If you read North, you wonder if he saw the movie, because what he reviews is something else entirely.

Sunday, September 2, 2012

Knoxville News-Sentinel
By Dr. Harold Black
Sunday, September 2, 2012
In most areas, government has an unbroken record of failure. Yet we tolerate it. Over $16 trillion has been spent on the War on Poverty with no impact on the percentage of people in poverty. This past year welfare spending is $668 billion spread over 126 programs or about $14,000 per poor American.
The question is how much of the money actually redounds to the benefit of the recipient or is used simply to support those who administer the money? Years ago when I reached the point where I was paying enough in income taxes to support a family of four above the poverty level, I said that I wouldn't mind paying the taxes if you just assigned me a family. I would send them the check every month — instead of to the IRS. That way I could get pictures of the kids, visit them at Christmas and take them to baseball games.
There is an obvious disconnect between expenditures and results. Unlike the market, which punishes failure, the government rewards it. Just like the Department of Education has failed to increase educational achievement and the Department of Energy has failed to provide for energy independence, there is no doubt that the War on Poverty has been a failure.
In 2009, President Obama stated that he "will use only one test when deciding what ideas to support with your precious tax dollars: It's not whether an idea is liberal or conservative, but whether it works."
So what was his response to a major study which showed that Head Start has spent more than $100 billion without there being any difference after the first grade between children who were in Head Start and those that were not? The administration recommended an increase in Head Start funding.
Currently, Head Start costs $22,600 per child versus the average cost of day care being $9,500. Don't you think we could do better? Of course we could.
If bids were taken to fund Head Start at $10,000 per child, the market could produce results that would truly create a head start for those kids. Instead of the government collecting and doling out the money for programs, we should privatize most of government. If we wanted to get people out of poverty rather than keeping them impoverished, we should tie incentives to the receipt of funds.
As Ben Franklin said "I am for doing good to the poor, but … I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed … that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."
If we put the various programs out for bid, we would get innovative solutions that would work. If the company that received the contract could not produce the results, then it would have to pay a hefty fine.
The same could be done in education and in energy. Since the founding of the Department of Energy we have become less energy independent. Privatizing education would result in higher levels of achievement across the board.
Do you know that there are programs that result in higher levels of reading proficiency in areas serving at-risk children than are achieved in even the "best" public schools in Knoxville? So instead of bemoaning the state of poverty, of education and of energy, privatization would produce the results that most of us should demand from our governments.
To quote Alfred Jay Nock, "It is a curious anomaly. State power has an unbroken record of inability to do anything efficiently, economically, disinterestedly or honestly; yet when the slightest dissatisfaction arises over any exercise of social power, the aid of the agent least qualified to give aid is immediately called for."

About Me

Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com